If you’ve ever asked yourself, “Will I qualify for a mortgage?” you’re not alone. Many aspiring homeowners wonder whether they have what it takes, financially speaking, to be approved for such a large loan. The truth is: preparing for a mortgage takes a lot of financial discipline. Before applying, you need to do the necessary groundwork to set you up for success.
While not all mortgage lenders weigh qualifying factors the same, the approval criteria are generally the same across the board. So, if you’re wondering how to qualify for a mortgage in Canada, know that all of the best mortgage brokers in Canada will guide you toward a lender that will consider four major factors:
- Income
- Down payment
- Credit score and history
- Property of interest
Understanding these criteria can help you determine what you may need to improve on and how to qualify for a mortgage loan.
How to Qualify for a Mortgage
Demonstrate a Reliable Income
Lenders will almost always look first at whether you have a stable annual income before approving you for a mortgage. To demonstrate that you do, you’ll likely need to provide the lender with recent pay stubs, a letter of employment, or two years of tax returns (especially if you’re self-employed). Generally speaking, those who earn a less stable income will typically be met with higher mortgage rates to make up for the added risk to the lender.
To find out what size mortgage you might qualify for, a good place to start is with a mortgage affordability calculator. A mortgage affordability calculator will provide a rough idea of how much you can afford to borrow, and whether you can handle the estimated monthly payments. Keep in mind that a calculator is just a starting point. Your mortgage lender will break this down further when reviewing your application.
Satisfy GDS and TDS Ratios
Mortgage lenders use gross debt service (GDS) and total debt service (TDS) ratios to see what you can afford based on your annual income. They follow the Canada Mortgage and Housing Corporation (CMHC)’s guideline of no more than 39% of your monthly income going toward housing expenses.
Suppose you can’t qualify for a mortgage based on your GDS ratio. In that case, you’ll need to either reapply when you have a higher income or get another party involved like a co-signer or guarantor with strong finances. Adding a guarantor or co-signer to your loan application means they are responsible for paying the mortgage too, which reduces the risk to your lender.If your TDS ratio prevents you from qualifying for a mortgage, the best step you can take is to pay off debt. Next, you’ll have to pass the mortgage stress test.
Pass the Mortgage Stress Test
Finally, the last step in demonstrating a sufficient income for your mortgage is to pass the mortgage stress test. Your lender will check to see if you would still be within the recommended GDS ratio if your mortgage interest rate were to increase by two percentage points or reach the Bank of Canada’s 5-year benchmark rate (currently 5.25%,) whichever happens to be higher. If you pass the stress test, you’ll likely qualify for a mortgage.
Choose the Right Down Payment Size
While a larger down payment will lower your mortgage payments and improve your chances of qualifying by lowering your risk profile, it will also make it much easier to meet GDS and TDS ratios.
One of the biggest benefits of paying more upfront is reducing the interest you’ll pay over the length of your mortgage.
The minimum size of your down payment depends on the purchase price of the home you’re looking at, but generally speaking you’ll have to pay at least 5%-20% of the purchase price. If you put down more than the minimum amount required, this can help you qualify and make up for other areas where you may fall short.
David O’Leary, CFA charterholder and WealthRocket’s personal finance expert, recommends considering the following factors when deciding on a down payment amount:
- Mortgage rate: The higher it is, the more you’ll want to pay upfront
- Down payment source: If funding comes from your RRSP or FHSA, it might make sense to take out more tax-free. But if you’re withdrawing from a taxable investment account, you may want to withdraw less
- Financial goals: For example, maybe you’re saving for your children’s education. A smaller down payment leaves more for an RESP contribution that will be matched up to 20%
- Investment opportunities: You may want to keep more money invested if your rate of return is high
Credit Score Requirements
To qualify for a mortgage with an A lender (a bank or financial institution that lends to those with at least average credit), you’ll need a credit score of 660 or higher.
If you struggle with low income or bad credit, B and C lenders are an option, which have more flexibility with credit history or salary. However, having a lower income or poor credit makes you a riskier borrower and will likely subject you to higher mortgage rates.
Before resorting to secondary lenders, you should try to improve your credit score. You can do this by never missing bill payments, lowering your credit utilization ratio, or creating more credit streams that you pay off on time or early.
The Risk Level of Your Property
The home’s location, intended use, and structure can impact the lender’s decision on whether or not you qualify. For example, some lenders won’t issue mortgages for off-grid homes or homes in ultra remote areas, which can limit your lending options. Similarly, an investment property may warrant a higher down payment than a primary residence. Any limitations around the property you’ve chosen usually have to do with the lender’s risk appetite.
With that in mind, you’ll want to make sure the home’s use and composition and the lenders available to you align with your financial situation. To increase your chances of approval, it’s worth clarifying whether the lender even approves your property type first.
Required documentation for a mortgage loan
While requirements can vary from lender to lender, you should have the following documentation ready when applying for a mortgage:
- Proof of employment and income: Recent pay stubs, electronic direct deposit record, T1 General tax return with your Notice of Assessment, proof of prior place of employment, and proof of any additional income you make.
- Proof of down payment: Record of withdrawal from RRSP or FHSA, statement of savings from the last three months, a sale agreement, or a letter to confirm a gifted payment if applicable.
- Financial details: Assets and liabilities, void cheque, and a pre-approval certificate.
- Property documentation: Real estate listing, sale agreement, full address, added housing cost estimates (like property tax), your lawyer’s contact information.
Common Mistakes When Applying for a Mortgage
No one is perfect, and homebuyers – especially first-time homebuyers – tend to make mistakes when applying for their first mortgage. These mistakes can cause delays in receiving funding, denial of your mortgage application, and considerable stress. Here are some of the most common scenarios and how to avoid them.
- Being financially unprepared: Buying a home comes with many ancillary costs, many of which may come as a surprise. Account for closing costs, home insurance, property taxes, or condo fees. Budget 3-5% of the purchase price for these costs.
- Thinking home costs stop at the mortgage payment: Unlike renting, you’re responsible for more than the monthly mortgage payment—budget for utilities, insurance, property taxes, maintenance, and renovations.
- Rising interest rates: If your mortgage is variable, remember your borrowing cost rises when national rates rise. Make sure you can afford higher mortgage payments.
- Not knowing what you are signing: Mortgage contracts are lengthy. Still, they are also the legal document representing the biggest purchase you’ll ever make. Make sure you completely understand the terms and conditions of your mortgage.
“Many people have agreed to purchase a home and take on a mortgage based on a set payment,” says O’Leary. “But interest rates have risen so high, so fast that their new payment is far too expensive for them, and they can’t afford the house they’ve agreed to buy by the time the purchase closes.”
Financial risk can also extend to whomever has helped the homebuyer secure their mortgage.
“I’ve seen a lot of parents helping their kids get a mortgage by gifting them money to help provide a down payment,” says O’Leary. “Sometimes they sign on the mortgage to help their kids get approved. Many people don’t realize this means their parents are now equally on the hook for the mortgage. So if the kids end up in financial trouble and file a consumer proposal or bankruptcy, the banks can come after the parents for the money.”
Other Factors That Affect Your Mortgage Application
There are several other factors O’Leary says can come into play when lenders review your mortgage application, including:
- Assets and savings: Your ability to save money can be an indicator of financial stability
- Amortization period: Shorter amortization periods mean higher monthly payments
- Interest rate type: Variable rates may be more challenging to qualify for due to the potential for rate increases and the stress test
- Loan-to-value (LTV) ratio: This is the ratio of your loan amount to the appraised value of your property. An LTV ratio above 80% will require mortgage default insurance
- Mortgage default insurance: Down payments worth less than 20% of the purchase price automatically require mortgage default insurance, which can affect the overall cost of your mortgage and may influence your lender’s decision to approve you
- Market conditions: The economy and housing market can inform a lender’s policies, which are used to review mortgage applications.
- Immigration status: Non-residents or new immigrants may face more requirements or limitations when securing a mortgage
How to Apply For a Mortgage
To get started on applying for a mortgage, take the following steps:
- Introduction call. Speak to a few mortgage brokers and choose one that can find you a lender that fits your budget.
- Get pre-approved. It’s good to secure a pre-approval before viewing homes. This ensures you’re ready to make an offer when you find the right home. That said, only serious buyers should request a pre-approval, as hard credit inquiries can temporarily lower your credit score.
- Mortgage approval and funding. Once the seller accepts your offer and signs a purchase agreement, the lender will make its final approval and grant you a mortgage.
Now that you know how to qualify for a mortgage in Canada, consider these factors before making one of the biggest purchases of your lifetime. Rather than having a lender deny your mortgage application for avoidable reasons, come prepared. Arm yourself with knowledge and documentation when buying your first home.
FAQs
How much of a mortgage can I qualify for?
Your maximum mortgage size depends on many factors, including income, credit history, and down payment size. You can use a mortgage calculator to get an estimate, but the best way to determine the exact number is to work with a mortgage broker.
What do you need to qualify for a mortgage?
You’ll need a healthy income and a good credit score to qualify for a mortgage. You’ll also need a down payment that meets the minimum requirements and a property that meets lender requirements. You’ll also need the appropriate documentation that proves all of this.
How much income do I need for a mortgage?
There is no set income for a mortgage application. Your income must prove that you can consistently cover the lifetime of the loan through monthly payments.
